Deadline looms for consolidating federal college loans to lock in lower rates By Pamela Yip

By Pamela YipTHE DALLAS MORNING NEWS

May 14, 2006

If you borrowed money for college and haven't paid it all back, take a close look at your options for consolidating federal education loans.

The magic date for you is July 1. That's when the interest rates are set to rise significantly. Experts advise students and parents to consolidate their loans before then to lock in the current low rates.

Web offers help on student loans

KNIGHT RIDDER NEWS SERVICE and THE DALLAS MORNING NEWS

For many college graduates, dealing with student loan debt ranks right up there with finding a career job. One method for recent grads to deal with student loans borrowed during the college years is through loan consolidation. Here are some sources of information at Web sites.

The variable interest rate on existing federal student loans will be recalculated by the U.S. Department of Education on May 30, and the new rates will go into effect on July 1.

Mark Brenner, vice chairman of College Loan Corp., a student loan lender, says the hike will be the “biggest increase in the history of the (student loan) program.”

Rates are expected to rise at least 1.5 percentage points “and maybe as much as 2 percentage points,” says Pat Scherschel, vice president of loan consolidation for Sallie Mae, the largest college-loan finance company.

In addition, interest rates on new loans issued after July 1 will have substantially higher fixed rates instead of variable rates.

The rates on the cheapest money students can borrow – subsidized Stafford loans – will jump to a 6.8 percent fixed rate on July 1 from variable rates that currently are as low as 4.7 percent.

Rates for the Parent Loans for Undergraduate Students, or PLUS loans, will rise to a fixed 8.5 percent from the current 6.1 percent.

Don't dillydally on this one.

Parents or students “must get their consolidation application in by June 30,” Scherschel says. “The penalty in being one day late in your paperwork is to pay potentially thousands of dollars more,” she says.

Generally, it's best to consolidate your loans at least a month before the deadline to give lenders time to process the paperwork, Kantrowitz says.

The average student with $20,500 in subsidized Stafford loans can save almost $3,000 in interest payments over the life of the loan by locking in a current repayment rate of 4.5 percent instead of letting the rate reset at the projected rate of 6.99 percent, according to College Loan.

Parents with PLUS loans can consolidate existing loans to lock in the current rate of 6.1 percent vs. a projected rate of 7.79 percent.

“Being able to lock in these low fixed rates is one of the best financial opportunities they'll ever have,” Brenner says.

Loan consolidation combines several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the standard 10-year repayment plan.

Depending on the loan amount, the term can be extended from 12 to 30 years. The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term, the amount of interest paid is increased.

Kantrowitz says it's “a common misconception” that student loans can be consolidated only once in a lifetime.

“Borrowers can consolidate multiple times, so long as each new consolidation loan includes at least one unconsolidated loan,” he says.

One benefits to loan consolidation is that you have a single monthly payment, as opposed to multiple payments for multiple loans.

Also, it raises your credit score because it shows that you've paid off all your existing student loans, which reduces the number of loans you owe, and shows you successfully paid off a series of debts.

The first step in consolidating is to contact your lender. You will need to provide details of each student loan you wish to consolidate.

The new consolidation loan will be opened in your name for the exact amount you owe. The new loan's proceeds are then used to pay off each holder of your existing loans.

The new single loan features a fixed interest rate calculated as the weighted average of the rates of the loans consolidated, adjusted up to the nearest 1/8 percent and capped at 8.25 percent.

Repayment on a consolidation loan begins within 60 days of disbursement, unless the borrower qualifies for a deferment or forbearance.

A deferment allows a borrower to postpone repaying the loan for a specified period. Most federal loan programs allow students to defer their loans while they are in school at least half time.

If you have a subsidized loan, the federal government pays the interest charges during the deferment period. If you have an unsubsidized loan, you are responsible for the interest that accrues.

Forbearance can be an option for borrowers with temporary financial difficulty.

A forbearance allows a borrower to suspend or reduce payments under certain circumstances and for specified periods.

Forbearances are granted at the lender's discretion. You can't receive a forbearance if your loan is in default. During a forbearance, the borrower must continue paying the interest charges, even on subsidized loans.

Brenner, of College Loan, has one final piece of advice for parents and students anxious over paying for college.

“The one thing I would remind families of is to stay calm,” he says. “There are lots of different ways for that family to pay for the education.”